3(21) Fiduciary: An Investment Advisor acting in this capacity only recommends investments to include and suggests replacements as appropriate. The Plan Sponsor (i.e., Employer) still retains responsibility for investment decisions.
3(38) Fiduciary: An Investment Advisor acting in this capacity is appointed in writing by the plan sponsor to manage the investment process. He or she is solely responsible for selecting, monitoring, and replacing of plan investment options. The trustee and other plan fiduciaries are relieved of the responsibility for investment decisions.
401(k) Plan: A 401(k) plan, as defined by the IRS, is a defined contribution plan where an employee can elect to make contributions from his or her salary, pre or post-tax, depending on the plan. The employee can choose investment options for the contributions. In addition, an employer may make Matching Contributions and/or a Profit Sharing Contribution. SIMPLE 401(k) and Safe Harbor 401(k) plans require mandatory Employer Contributions.
408(b)(2): This form requires service providers to provide plan fiduciaries with certain information about the services they provide to the plan and the specific compensation they receive for such services, both direct and indirect. Read the final regulation here.
Auto Enrollment: Enrolling all eligible employees in a plan and starting deferrals. The Plan Participant must opt out rather than opt in to the plan.
Blackout Period: When a Plan Sponsor (i.e., Employer) switches from one Plan Provider to another, there is typically a period during which Plan Participants cannot make changes to their investment selections. A Blackout Period can last up to 60 days.
Bundled Plan: This is a plan with a single provider that supplies all administration, recordkeeping, education, and investments.
Closed Architecture: The plan sponsor may only choose investments that the Custodian has chosen to make available.
Custodian: The bank or trust company that holds the plan assets. It provides safekeeping of securities, but does not engage in investment management.
Due Diligence Plan: A written plan or checklist that helps Plan Fiduciaries ensure that they have done their due diligence in creating and maintaining a 401(k) retirement plan that meets ERISA and IRS guidelines and that serves the best interests of Plan Participants and Beneficiaries.
Employer Discretionary Contributions: The amount of Profit Sharing Contribution an employer chooses to contribute to a retirement plan. The contribution is tax deductible to the employer as a business expense and earnings on the contributions are deferred until withdrawal.
Employer Matching Contributions: The amount of Matching Contributions an employer chooses to pay on behalf of qualifying Plan Participants, typically stated in the Plan Document as a specific percentage of an employee’s contribution up to a specified limit (e.g., 25% of employee contributions up to 6% of salary).
ERISA: Passed in 1974, Employee Retirement Income Security Act, ERISA, is a federal law that sets minimum standards for employers who establish and maintain private pension plans.
Fiduciary: An individual charged with the duty of acting for the benefit of the Plan Participants. This person is responsible for ensuring all actions taken in relation to the plan are done with the intent to benefit the Plan Participants.
Forfeiture: The portion of an employee’s account balance (employer contributions or matching contributions) that is lost when an employee terminates employment. This occurs when an employee is not fully vested. An employee’s Salary Deferrals are always 100% are vested and never forfeited.
Fidelity Bond: A bond that protects Plan Participants in the event a Fiduciary mishandles or steals plan assets.
Group Annuity: The plan assets are held in an annuity contract at an insurance company. The benefit is defined monthly distributions at the time of retirement. The significant consideration is the high cost of these plans and how it affects your portfolio balance in the long-run.
Investment Manager (or Investment Advisor): The person responsible for managing the assets, or making recommendations for the investment choices.
Investment Policy Statement (IPS): A written statement that states:
- The plan’s overall investment philosophy and objectives
- Who is responsible for choosing and monitoring plan investments
- How the investment choices and what asset classes will be chosen
- How the plan will evaluate investment funds offered and at what frequency
- What circumstances warrant the removal of investment funds or managers? What will be the process for doing so?
Open Architecture: A Plan Sponsor (i.e., the Employer) may choose absolutely any investment to include on the fund menu.
Plan Administrator: The person specified in the 401(k) Plan Document that is responsible for running the plan. The Plan Administrator might be the employer, a committee of employees, a company executive or someone the company has hired to administer the plan.
Plan Beneficiary The person(s) or Trust that is designated to receive the balance of the account and other benefits owed to a Plan Participant in the event of his/her death.
Plan Document: A written document that governs all aspects of the 401(k) plan including how the plan is established and maintained
Plan Fiduciary: Anyone who exercises discretionary authority or control of the management or administration of the 401(k) plan, the disposition of plan assets, or gives investment advice for a fee or other compensation with respect to plan assets
Plan Participant: A qualifying employee who participates in an employer’s 401(k) retirement plan
Plan Sponsor: The employer
Plan Trustee: A person with exclusive authority and discretion to manage and control 401(k) plan assets. The trustee can be subject to the direction of a named Plan Fiduciary and that Plan Fiduciary can appoint one or more Investment Managers for the plan’s assets.
Plan Year: A 12-month period specified in the 401(k) Plan Document that is used for calculating eligibility and vesting. It may be a calendar year, or another 12-month period such as an employer’s fiscal year
Qualified Plan: A private retirement plan that meets IRS rules and regulations. In most cases, contributions to the plan are tax-deductible. Earnings are not taxed until withdrawal.
Record Keeper: This is the Custodian of plan assets or the plan’s investment platform. The Record Keeper is responsible for valuing investments, providing Plan Participants with statements on their accounts, and processing distribution checks.
Safe Harbor 401(k) Plan: Similar to a traditional 401(k), a Safe Harbor 401(k) plan requires that an employer make contributions for each employee. The benefit to the employer is to avoid administrative burdens and testing to ensure compliance with ERISA and IRS rules and regulations.
Salary Deferral: The amount (dollar amount or percentage) a Plan Participant elects to have withheld from his or her paycheck to be deposited into the 401(k) plan on his or her behalf. Also called Employee Contributions or Elective Deferrals
Service Provider: A company that provides any service to the plan, such as investment management, recordkeeping, plan administration, and/or education to employees
Third Party Administrator (TPA): The major responsibilities of the TPA include the calculation and allocation of Employer Contributions, all compliance testing, filing annual 5500 forms, tracking employee eligibility, and designing a plan that meet the employer’s needs.
Unbundled Plan: These plans allow for the plan sponsor to choose the TPA, Record Keeper, and Investment Manager separately. This often allows for a significant reduction in cost, and the Investment Manager often finds and recommends the other parties.
Vesting: The percentage of ownership an employee has in employer matching or profit sharing contributions made on his or her behalf into his 401(k) account. The vesting schedule is stated in the Plan Document and is based on years of service. Employee Contributions (i.e., Salary Deferrals) are always 100% vested. For more on vesting, visit IRS.gov.
Some of the above definitions come from the Internal Revenue Service.